Customer Order Flow, Intermediaries, and Discovery of the Equilibrium Risk-Free Rate

A.J. Menkveld, A. Sarkar, M. van der Wel

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

Macro announcements change the equilibrium risk-free rate. We find that Treasury prices reflect part of the impact instantaneously, but intermediaries rely on their customer order flow after the announcement to discover the full impact. This customer flow informativeness is strongest when analyst macro forecasts are most dispersed. The result holds for 30-year Treasury futures trading in both electronic and open-outcry markets. We further show that intermediaries benefit from privately recognizing informed customer flow, as their own-account trading profitability correlates with customer order access. © Copyright © Michael G. Foster School of Business, University of Washington 2012.
Original languageEnglish
Pages (from-to)821-849
JournalJournal of Financial and Quantitative Analysis
Volume47
Issue number4
DOIs
Publication statusPublished - 2012

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